Why Many Startups Fail to Scale Rapidly
Originally published in our blog.
There are many factors that prevent startups from scaling rapidly. These can range from founder infighting, the inability to build a solid talented team, to the product not meeting the precise needs of the market.
Furthermore, most startups fail because they scale prematurely. According to the Startup Genome Report, 74% of startups fail because of premature scaling. But on the plus side, those who do get it right usually see growth that’s twenty times faster.
Although that percentage is extremely high, there are also many successful stories. For example, the cloud-based team communication and collaboration platform Slack managed to scale quickly over a period of three years. The growth of the startup was spurred by the popularity of the app alone.
Slack’s successful growth over a three year period saw them raise $160 million in funding when it had a valuation of $2.8 billion. The team also grew from 8 to 385 employees within 14 months. About a year later, the valuation of the company also skyrocketed to $3.8 billion which also attracted another $200 million in funding.
But what makes one startup successful while leaving another down in the gutter isn’t exactly obvious. Growing a new company is a lot more than just securing finance.
But before we jump right into it, let’s first clearly define what is meant by “scale.”
What is Scale?
There are multiple definitions for the word in the context of modern tech businesses. One that comes up often is simple and describes scaling as a system whose performance improves once it acquires resources in proportion to the to the capacity added.
However, if you go by this definition, equal increases in revenue and expenses will also be deemed as scaling. But that’s not exactly growth if a company isn’t turning a profit. The business has to be able to grow its revenue a lot faster than its expenses to be successful.
Scaling also goes beyond the highest number of users and customers a new company can attract. But one thing is for certain when a small business starts to look like it’s ready to step up a level, it also has to start acting like a fully fledged company.
To scale a new company, you have to first understand the factors that are limiting its growth. Then it can be addressed and resolved to get the business back on an upward trajectory.
If the startup doesn’t know what’s stifling its growth, any move to scale will be destined to fail. So how should you approach it?
1. DON’T SET OUT TO GROW OUTWARDS FROM THE START
Instead of looking outside to grow the business, first, try to create a platform for a single user base that’s a huge success. Once the business figures out what makes it work for one user base, then it can try and replicate it for other groups of users (when the time is right).
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The primary benefit of following this approach is to provide startups with an opportunity to customize the platform based on needs of each new segment of users that the company decides to target. This approach also gives businesses more control over the whole expansion process.
2. MAKE TIME TO MAKE MISTAKES
Scaling rapidly doesn’t allow companies the luxury of making mistakes and learning from them. It also makes it hard to predict how the business will handle the pressure of scaling overnight.
If the infrastructure is lacking or the website crashes, customers will be lost and that’s the last thing anyone wants. But by growing out slowly, there will be enough time to test and retest every aspect of the operation to ensure that it can actually scale.
3. DON’T WAIT TO MAKE THE RIGHT HIRES
When a new business plans to scale, they also have to grow their team to sustain it. But if the primary focus is on getting the number of users up before recruiting new employees, then the startup can be setting itself up for settling for whatever it can find.
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It’s almost impossible to seek out and attract the best minds overnight, so starting this process early will be hugely beneficial.
Although scaling requires a scientific approach, sometimes it doesn’t (it’s just not that simple). So there’s really no one size fits all kind of formula to this.
Successful scaling will be relative to the startup, the user base, and plenty more. Regardless of how a startup chooses to grow, it must do it without compromising the product or losing revenue.
On a final note, scaling isn’t everything. Sometimes it can be highly rewarding to do something really well, even if it can’t scale. Why? Just think about that one for a minute.